How to enhance your asset allocation
How to enhance your asset allocation Brussels, May 19th, 2011 Jean-Yves Dumont, CFA, CMT Head of Asset Allocation Strategy & Funds Dexia Asset Management • • • How to enhance your asset allocation Agenda 1. Asset Allocation process 1. Strategic Asset Allocation 2. Optimized Asset Allocation 3. Tactical Asset Allocation 4. Downside Risk Control 2. Asset Allocation Strategy 2 May 2011 How to enhance your asset allocation Key points Long term investment Capital Preservation Combining traditional diversified fund management and innovation: Broad diversification to various asset classes Dynamic and flexible asset allocation process A high conviction process with wide and asymmetric deviation margins Risk management included throughout the whole investment process with the use of advanced risk measures and integration of Downside Risk Control in order to protect against short term unanticipated fluctuations of financial markets 3 May 2011 How to enhance your asset allocation Breaking with conventional investment wisdom Although it has long been mathematically proven that strategic asset allocation accounts for the lion’s share of returns in a diversified portfolio, the asset management industry has hitherto paid relatively little attention to it Most of the research capacity was spent taking Strategic Asset Allocation (Long Term) Optimised Asset Allocation (Medium Term) temporary tactical deviations through a tactical allocation process, as well as security selection But if the strategic framework is not right, the tactical deviations will not protect the client against what could turn out to be sizeable losses. In the worst-case scenario this unquestioning focus on the tactical allocation process can lead to the proverbial Pyrrhic victory The global financial crisis has challenged conventional investment wisdom and has put to trial the standard model of a long-term static framework (strategic asset allocation) with short-term deviations around it (tactical asset allocation) At Dexia AM we work with a dynamic intermediate step, the ‘Optimised Asset Allocation’ to be able to weather various economic environments 4 May 2011 Tactical Asset Allocation (Short Term) Security Selection How to enhance your asset allocation Global view of the process Client’s investment profile & Investment constraints Strategic Asset Allocation Long Term Horizon of expected returns 3 - 5 years Frequency of revision: at least once a year Horizon of expected returns 1 - 3 months Frequency of revision: continuously Optimised Asset Allocation Medium Term Neutral Equity Weight (Defensive 0%, Low 30%, Medium 50% or High 70%) Dynamic allocation Tactical Asset Allocation Short Term Downside Risk Control Constraints Regulatory / Investment Policy Fixed Income 5 May 2011 Equity Portfolio construction Risk Management Ex-post / Ex-ante Commodities Real Estate Alternative Products Money Market How to enhance your asset allocation Strategic Asset Allocation Long term Large range of asset classes Government Bonds Corporate Bonds: Investment Grade Stagflation Inflationary Growth Growth Up Inflation Up Growth Down Inflation Up Credit bonds including the financial sector High Yield Bonds: Non investment grade bonds i.e. with a rating less than BBB Emerging Bonds Equities including Emerging Markets Inflation Lkd Bonds Commodities Alternative Low Vol Real Estate Real Estate: Listed real estate Commodities including Energy Alternative Strategies Alternative Strategies Cash Equities Govt. Bonds Alternative Low Vol High Yield Bonds Corporate Bonds Emerging Bonds Alternative Low volatility Strategies: alternative funds whose strategy generates a low volatility (i.e. less than 5%) and generally low correlation with other asset classes Growth Down Inflation Down Recession 6 May 2011 Growth Up Inflation Down Non-inflationary Growth How to enhance your asset allocation Challenging the Traditional Way Optimised Asset Allocation Medium term As indicated earlier, there is a need to move away from traditional static benchmarks and to start using dynamic asset allocation processes and advanced risk management techniques in order to be able to weather various economic environments We propose a dynamic, more efficient and well diversified asset allocation (Optimised Asset Allocation) than the traditional static reference asset mix (Strategic Asset Allocation) Dynamic: Since expectations in returns and correlations between asset classes are changing over time, the Optimised Asset Allocation is regularly reviewed in order to stabilize the risk-return profile More Efficient: risk is allocated in a much smarter way, using appropriate statistical techniques and applying an advanced risk measure that takes into account tail risk Well diversified: much broader set of asset classes 7 May 2011 How to enhance your asset allocation Optimised Asset Allocation Medium term Introducing expected shortfall as a more appropriate risk measure Volatility: measures how returns are expected to be dispersed over time (using standard deviation). It characterizes the risk around the mean How can things evolve? Value at Risk (VaR): measures the maximum loss not exceeded with a given probability (called degree of confidence) over a given time horizon. It characterizes the risk of the left-tail of the distribution How bad can things get (at a given horizon)? Expected Shortfall, also known as Conditional Value at Risk (CVaR): measures the average loss below the VaR. It characterizes the fatness of the left-tail of the distribution If things do get bad, how much could I lose on average? We use this risk measure, which is a tailrisk measure 8 May 2011 How to enhance your asset allocation A Process based on Multiple Drivers Implementation of Dexia Asset Management views on short-term market movements Tactical Asset Allocation is based on three sets of drivers: I. Fundamental Drivers Dynamics Drivers Reversal Drivers 9 May 2011 Where do we go? How do we get there? Is the prevailing trend about to reverse? Tactical Asset Allocation Short term Fundamental Drivers: the macroeconomic environment in a long term valuation perspective II. Dynamics Drivers: the market studied from dynamics angle: earnings, price and risk appetite momentum III. Reversal Drivers: composed of several qualitative and quantitative indicators and helps to determine if the prevailing trend is about to change/reverse How to enhance your asset allocation A dynamic process: our main tactical moves in 2010 10 May 2011 Tactical Asset Allocation Short term How to enhance your asset allocation Downside Risk Control Downside Risk Control (DRC) Past Performances Diversification works in the long term but does not protect from unforeseen short term fluctuations in the market Performance Up Uncertainty Low Performance Down Uncertainty Low methodology has been integrated in the allocation process with the aim to limit the downside risk This method is fundamentally based on two elements: Past performances The uncertainty of the markets As such, when the uncertainty on the markets becomes too large or when the performances of the portfolio are too weak, the manager will put the focus on the reduction of risk rather than the research of a superior return 11 May 2011 Market Uncertainty Therefore an additional investment Continue to invest Start to disinvest Start to invest again Continue to disinvest Performance Up Uncertainty High Performance Down Uncertainty High (*) Investors should not consider the use of the downside risk control mechanism as a form of capital protection. How to enhance your asset allocation Downside Risk Control A concrete case : Dexia Portfolio Advanced (DPA B) Since mid-June 2007, this methodology has been applied with success within the Dexia Portfolio Advanced funds 40% 0% -5% 35% Progressive but quick reinvestment in equity to more than 20% 30% 25% 20% 15% 10% -10% -15% -20% -25% -30% Around 0% of Equity during the peak of the crisis -35% -40% -45% -50% 5% -55% -60% Ja n0 Fe 8 b0 M 8 ar -0 A 8 pr -0 M 8 ay -0 Ju 8 n08 Ju l-0 S 8 ep -0 O 8 ct -0 N 8 ov -0 D 8 ec -0 Ja 8 n0 Fe 9 b0 A 9 pr -0 M 9 ay -0 Ju 9 n09 Ju l-0 Au 9 g0 Se 9 p0 O 9 ct -0 D 9 ec -0 Ja 9 n1 Fe 0 b1 M 0 ar -1 A 0 pr M 10 ay -1 Ju 0 n1 A 0 ug -1 S 0 ep -1 O 0 ct -1 N 0 ov -1 D 0 ec -1 Ja 0 n11 0% % of Equity in DPA B Low 12 May 2011 Source: Dexia AM, Bloomberg Composite Equity (RHS) *65% MSCI EUR, 25% MSCI World Ex-EUR, 10% MSCI EMG Markets How to enhance your asset allocation Downside Risk Control A concrete case : Dexia Portfolio Advanced (DPA B) Better risk protection observed since June 2007 within the Dexia Portfolio Advanced Last update as of 31/12/2010 De xia Portfolio Advanced Good historical performances Since Inception 2008 2009 YTD 2010 Low 10,34% -1,50% 7,33% 4,27% Me dium 12,60% -6,19% 13,64% 7,26% High 17,53% -7,02% 18,19% 9,68% Since Inception 2008 2009 YTD 2010 S&P -14,31% -38,49% 23,45% 12,78% Stoxx 50 EUR -29,95% -43,43% 24,06% 0,04% 8,75% -54,48% 74,50% 16,36% Since Inception 2008 2009 YTD 2010 17,55% 9,37% 4,32% 1,17% Stock Inde xe s MSCI Emerging Mkts Bond Inde x JP Morgan EUR Govt Bonds *Inception date: June 08th 2007 20,00% 200,00% 10,00% 100,00% 0,00% 0,00% -10,00% -100,00% -20,00% -200,00% -30,00% -300,00% -40,00% -400,00% -50,00% -500,00% -60,00% janv.-08 13 May 2011 Smooth and consistant returns -600,00% avr.-08 juil.-08 oct.-08 janv.-09 Composite Equity avr.-09 juil.-09 DPA B MEDIUM oct.-09 janv.-10 MSCI EUROPE avr.-10 juil.-10 oct.-10 janv.-11 VIX (RHS) Sources: Dexia AM, Bloomberg How to enhance your asset allocation The Investment Strategy Background favorable to risky assets Soft economic growth, inflation contained Macroeconomic background is supportive. In the US, from QE2 to self-sustained growth. Employment data improving. Accommodative monetary policies in developed world. Monetary policies remain globally very accommodative but tightening cycle has begun sooner than expected in Europe. 2 additional “tail” risks have emerged Main Risks: MENA unrest and strong increase in oil price currency war European peripherals Japan earthquake/tsunami, global impact on energy prices, causes supply chain disruptions 14 Background has changed somewhat May 2011 One has expanded: European peripherals: relief thanks to the increase of EFSF capacity and creation of ESM. Rate hikes in Europe will put more pressure on weakest countries like Spain. Scenario still positive but less favorable to equities globally Japanese disaster, increase in energy prices and start of tightening cycle should have a negative impact on 2011-2012 expected growth Higher increase in input costs (commodities, energy prices) may also negatively impact margins Economic momentum might have peaked Addresses Luxembourg Dexia Asset Management Luxembourg SA 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgium Dexia Asset Management Belgium Place Rogier 11 B-1210 Bruxelles Tel.: + 32 02 222 11 11 France Dexia Asset Management SA 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 15 May 2011 Australia Ausbil Dexia Ltd Veritas House – Level 23 207 Kent Street Sydney NSW 2000 Tel.: + 61 2 925 90 200 Switzerland Dexia Asset Management Luxembourg SA succursale de Genève 2, rue de Jargonnant 1207 Genève Tel.: + 41 22 707 90 00 Italy Dexia Asset Management Luxembourg SA Succursale Italiana Corso Italia 1 20122 Milano Tel.: + 39 02 31 82 83 62 The Netherlands Dexia Asset Management Nederlands bijkantoor Lichtenauerlaan 102-120 3062 ME Rotterdam Tel.: + 31 10 204 56 53 Spain Dexia Asset Management Luxembourg SA Sucursal en España Calle Ortega y Gasset, 26 28006 Madrid Tel.: + 34 91 360 94 75 Germany Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland An der Welle 4 60422 Frankfurt Tel.: + 49 69 7593 8823 Bahrain Dexia Asset Management Luxembourg S.A., Middle East Representative Office Bahrain Financial Harbour, Financial Center, West Harbour Tower, Level 23 King Faisal Highway PO Box 75766 Manama Tel.: + 973 1750 99 00 Canada Dexia Asset Management Luxembourg SA Canadian Representative Office 155, Wellington Street West 6th floor Toronto, Ontario M5V 3L3 Tel.: + 1 416 974 9055 Disclaimer This document is published purely for the purposes of information, it contains no offer for the purchase or sale of financial instruments does not comprise investment advice and it is not confirmation of any transaction unless expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when choosing its sources of information and passing on this information. Nevertheless errors or omissions in those sources or processes cannot be excluded a priori. Dexia AM cannot be held liable for any direct or indirect damage or loss resulting from the use of this document. The contents of this document may be reproduced only with the prior written agreement of Dexia AM. The intellectual property rights of Dexia AM must be respected at all times. Warning : If this document mentions the past performances of a financial instrument or index or an investment service, refers to simulations of such past performances or contains data relating to future performances, the client is aware that those performances and/or forecasts are not a reliable indicator of future performances. Moreover, Dexia AM specifies that: • in the case where performances are gross, the performance may be affected by commissions, fees and other charges; • in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency fluctuations. If this document makes reference to a particular tax treatment, the investor is aware that such information depends on the individual circumstances of each investor and that it may be subject to change in the future. This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and Council. If this information is a marketing communication, Dexia AM wants to clarify that it was not designed according to the legal requirements to promote the independence of investment research, and it is not subject to any prohibition on dealing prior to the dissemination of the investment research. Dexia AM invites the investors to always consult the fund prospectus before investing in a fund. The prospectus and other information relating to the fund are available on our site at www.dexia-am.com. 16 Money does not perform. People do. May 2011
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